Home > XE Currency Blog > XE Market Analysis: Europe - May 19, 2020

AD

XE Currency Blog

Topics7373 Posts7418
By XE Market Analysis May 19, 2020 3:44 am
    XE Market Analysis's picture
    XE Market Analysis Posts: 5297
    XE Market Analysis: Europe - May 19, 2020

    The dollar has remained soft amid a backdrop of rallying global stock markets, which are being buoyed by reopening economies, positive news on the development of a vaccine for the SARS Cov-2 coronavirus, and fresh pledges for further stimulus if necessary from the Fed, ECB and other central banks, factors which are managing to outweigh concerns about the ratcheting-up tensions between the U.S. and China, and Australia and China. The narrow trade-weighted USD index (DXY) fell to a 11-day low of 99.50, extending the decline from levels near 100.50 that has been seen over the last day. EUR-USD concurrently edged out a 15-day high at 1.0940. Cable logged a six-day high at 1.2268, extending the rebound from the seven-and-a-half-week low that was seen yesterday at 1.2075. The pound has also seen gains versus the euro and yen, while holding its own against the outperforming commodity currencies. The UK currency has been apt to correlate positively with global stock market direction over the period of the pandemic so far. AUD-USD posted an eight-day high at 0.6557, with the Aussie supported by the coursing risk-off backdrop in global markets and despite China confirming an 80% tariff on its imports of Australian barley, and with Beijing reportedly considering also targeting Australian wine and dairy in response to Australia's accusations about China's role in the pandemic. USD-CAD edged out a 14-day low at 1.3914. USD-JPY has been directionally challenged, carving out no more than a 15-pip range so far today, just below the one-week high that was seen yesterday at 107.51.

    [EUR, USD]
    EUR-USD edged out a 15-day high at 1.0940, underpinned by broader dollar weakness as the currency sees some of its safe haven premium unwind amid a backdrop of rallying global stock markets, which are being buoyed by reopening economies, positive news on the development of a vaccine for the SARS Cov-2 coronavirus, and fresh pledges for further stimulus if necessary from the Fed, ECB and other central banks. These factors have been managing to outweigh concerns about the ratcheting-up tensions between the U.S. and China, and Australia and China. The conflict between Germany's constitutional court and the ECB remains unresolved and could escalate further if the central bank continues to stretch the limits of its mandate in the quest to keep spreads in and prevent peripheral-state yields, particularly Italian, from rising. EUR-USD continues to trade in a broad consolidation range to the south of the halfway mark of the volatile range that was seen during the height of global market panic in March, which was marked by 1.0637 on the downside and 1.1494 on the upside. We expect the pair to lack sustained directional bias for now, though the somewhat frayed politics of the eurozone tips the balance toward downside risk. There is little divergence in central bank policy currently, with both the ECB and the Fed are pursuing aggressive easing policies, with both Europe and the U.S. facing significant economic headwinds from virus-containing lockdown measures. Europe and the U.S. are now in the early stages of economic reopening strategies, which is being accompanied by concerns that this might spark a second wave of coronavirus infections.

    [USD, JPY]
    USD-JPY has been directionally challenged, carving out no more than a 15-pip range so far today, just below the one-week high that was seen yesterday at 107.51. This reflects the fact that both currencies have been losing ground to most other currencies, especially the commodity currencies, amid a backdrop of rallying stock markets, which are being buoyed by reopening economies, positive news on the development of a vaccine for the SARS Cov-2 coronavirus, and fresh pledges for further stimulus if necessary from the Fed, ECB and other central banks, factors which are managing to outweigh concerns about ratcheting-up tensions between the U.S. and China, and Australia and China. The yen's weakness over the last day reflects an unwinding in its safe haven premium. Markets continue to largely overlook domestic developments in Japan. Data today showed March final confirming industrial production to have contracted 3.7% m/m. Japanese Q1 GDP numbers, released yesterday, confirmed that Japan is deep in recession, although slightly better than expected at -1.9% q/q. Markets have long been desensitized to incoming data, which currently is largely showing a backward-looking snapshot of economies in lockdown. Another 5.0-plus magnitude earthquake, this time near the Gifu prefecture, was reported today.

    [GBP, USD]
    Cable logged a six-day high at 1.2268, extending the rebound from the seven-and-a-half-week low that was seen yesterday at 1.2075. The pound has also seen gains versus the euro and yen, while holding its own against the outperforming commodity currencies. The UK currency has been apt to correlate positively with global stock market direction over the period of the pandemic so far. UK labour market data out today revealed a massive 856.5k spike in jobless claims in April, reflecting the impact of the lockdown, while the figures for March employment cover a period preceding the lockdown (which began on March 23rd in the UK), and showed the unemployment rate actually dipping, to a rate of 3.9% from 4.0% in February. Average household earnings data also preceded the lockdown, and showed a dip to a growth rate of 2.4% y/y in the three months to March in the with-bonus figure, down from 2.8% y/y in the three months to February.

    [USD, CHF]
    The SNB has successfully been putting a cap on the franc, which has seen EUR-CHF in recent weeks skirt along just above the five-year low that was first seen on March 9th at 1.0505 without breaching it. Weekly sight deposit data out of Switzerland has pointed to the extent of SNB franc selling over the pandemic crisis period, which was most acute in March before basing out as global governments and central banks acted with interventions and stimulus packages. A rise in sight deposits (money held by commercial banks) can suggest the francs turning up after being sold by the central bank. The 1.0500 level in EUR-CHF, while not a fixed floor, has clearly been a line in the sand of the SNB. The Swiss central bank has a long history of intervening to either limit of slow the pace of appreciation in its currency, which normally comes during periods of risk aversion in global markets and/or euro underperformance. From 2011 through to 2015, the SNB capped the franc via a 1.2000 floor in EUR-CHF. When the cap was abandoned in January 2015, the franc rallied by 30%, having become unfeasible for the SNB to counter the ECB's expansive monetary policies. A similar circumstance is afoot today, with the ECB maintaining expansive polices following a period of safe haven demand for the franc. In January, the U.S. added Switzerland to its list of currency manipulators. The move seemed a bit harsh given the franc is a demonstrably chronically-overvalued currency in purchasing parity terms (as illustrated by the Economist's Big Mac index), though the Trump administration argued that Switzerland should pursue a more expansive fiscal policy as a remedy.

    [USD, CAD]
    USD-CAD edged out a 14-day low at 1.3914, reflecting part broad weakness in the U.S. dollar and part outperformance in the Canadian dollar, which has been lifted by a backdrop of rallying global stock markets. Front-month WTI oil prices have settled today a little off the nine-week high that was seen yesterday at $33.32. Oil prices are likely to remain support amid signs of dropping supply and rising output as global economies reopen from lockdowns. Last Friday, data showed operating U.S. oil and natural gas rigs to have fallen to a record low for a second consecutive week.

    Paste link in email or IM